The Volex Rerating: From Recovery Play To Growth Stock?

6th Dec '19 by Jack Brumby

9 comments 6946 reads

Volex (LON:VLX) is a 127-year-old cable and wiring company five years into a financial turnaround and strategy shift. Its legacy business deals in commodity-like cabling - a thankless task that led the group into trouble a couple of years ago - but its growing Cable Assemblies division offers higher margin products. This is where investors are seeing an opportunity.

The group says it is benefitting from a growing reputation of quality and customer care in its end markets. This shift in emphasis could transform the market’s perception of Volex - in fact, it appears as though this is already happening:

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What we have here is an evolving investment case. Is the market scrabbling to play catch up?

The story goes that Volex is evolving from a recovery stock into a growth stock with a renewed focus on cash generative and higher margin business. With no debt and a more diverse customer base, the company is also considerably less risky than it was. It has even resumed dividend payments. The recent rerating is understandable.

But at just 0.5 times forecast sales and qualifying for two market-beating screens (one growth, one momentum) does Volex have further to run?

No sign of a moat...

I had wondered if Volex’s new strategy might spell the beginnings of an economic moat, but I don’t think this is the case. Volex certainly hasn’t had a moat in the past - that’s a part of why it ran into such big problems a couple of years ago.

There is potential, though, if it can develop value-added products and processes that are backed up by patents (Volex attributes about $1m of value to acquired patents).

What Volex is right now is a turnaround stock with a strengthened balance sheet that is moving (partly via acquisition) into higher margin, fragmented markets. There is execution risk in this, and, while the company can certainly grow, the question is whether it can grow profitably. Given its history of vending commodity-like products, this is a key concern.

Volex supplies some high growth markets such as electric vehicles and data centres, which both require complex cable solutions. This could be a significant source of growth going forwards, but will these areas in time also become commodified? And will the company need to continue investing large amounts of capital to meet the changing…

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STOCKWATCH UK

6th Dec '19

I add my notes from the Yellowstone Advisory Investor evening , held on the 5/11. Thank you for the above.

Daren Morris, the CFO and legal officer presented at the Yellowstone investor evening last night and ahead of interim results due 14/11. The upbeat AGM statement and $28.5m acquisition of Servatron ( cash, shares, electronic manufacturer, based in America) prompted meaningful upgrades and the shares have responded well. President Trumps policy of encouraging US companies to move production away from China is an underlying positive for Volex and their 13 global factories.

Volex has a £150m market cap and now listed on AIM. 2020e revenues are to be $420m, EBITDA $35m and a 1p dividend expected to be confirmed for the 1H,being around 3p for the FY, giving a 3.5% yield. $650m of turnover in the future was mentioned in the presentation.

Historical production of commodity cables (think kettles, TV cords etc) and power cords for Apple products became a big drag on Volex profitability and one that the past CEO tried to address but failed and left the PLC. Apple won the big fight. In 2015 Nat Rothschild became Executive Chairman (24.43% shareholder) and along with CFO together took a different approach to managing the Apples’ commodity cabling and pricing demands. Profitability returned as a result of operational improvements (layers of management removed, now direct orders to factories) and important changes in the business mix to higher margin products has helped the PLC’s outlook.

In 2014 Apple was 40% of revenues (rev $20m) and the top three were 50%. Apple is now 7% of revenues and with a more profitable working relationship established. Volex produced 125m cords last year. The B/S has cash and the financial ratios strong, all after a £35m rights issue some years ago. The AGM highlighted revenues were +12% for the Q1 period, helped by recent acquisitions and the power cord division should have a good 2H after contract wins. Margins are up too as better cost controls and higher margin products sold, as the product mix evolves.

The presentation touched on the historic customer pricing issues with commodity power cords for Apple products and the profitability turnaround since achieved. An unprofitable and dedicated Apple Chinese factory was offered to Apple to make a point but Apple declined it! A watershed moment, point proved. Power cords remains important but now with better margins and profitability. The medical cables division with Philips the main customer has high margins and the Philips finished products have FDA regulatory backed so do not get changed. The Washington based Servatron acquisition’s principle customers are in medical device production and aerospace. Boxed electronics. Data Centre cabling is growing with copper wires the best product for connecting optic roof cables to the racks of data machines in a centre, so long as less than 4 meters. Amazon designs their own data centres and Volex supplies the cables ( bought form Leoni) taking an ‘entrepreneurial approach’ to pricing. Amazon have been a customer for 2 years.

The highlighted and new customer source is EV (electric vehicles) charging cables with Tesla the big customer and on a 3 year cost pass through contract for supplying 2 pairs of home charging cables, in the truck. There cables are quality ones that cost $60 and not the historic $1 power cables Volex made and ‘quite big business’ Daren said about Tesla. Three times the amount of charging cables will be supplied 2020 v 2019 and revenues up 17% in 2 years. Tesla is the EV market leader and the established car manufacturers are now producing EVs in volume and using Volex charging cables. More news soon? Home charge cables cost is between $30-$100 a pair. Product development example from Dyson was given, going from lengthy coloured cables to no cables (only one cable product left) as the next generation has self charge housings and the product wand like with Volex making the charge points. The recent three acquisitions have all been customer lead, Daren told us and offering much more than power connectors for the PLC. The policies of President Trump are a help for Volex, as the 13 factories they have around the world can producing what was Chinese made and well situated for local markets and done quickly. The Mexico plant was highlighted as US cables manufacturing returns to North America and US customers benefiting from the short trip. The new Volex North America CEO was the owner of the recent US based Servatron.

Future FY Revenues of $650m were mentioned though N+1 ( brokers) has 2020e for $420m. The 1H, following from the positive AGM will see a margin discussion take place north of 10%’ in the future was mentioned

Jack Brumby

Thanks Stockwatch, that's some helpful detail.

Skweeka

Thanks, this recent Volex presentation is also worth a watch if you haven't already seen it:

https://www.fmp-tv.co.uk/2019/11/29/video-volex-plc-investor-presentation/

MichaelFBS

12th Dec '19

Great article, thank you. Volex (LON:VLX) certainly merits further investigation.

The may have a moat in the products for medical sector because “they are regulated by the FDA” (see minute 2:50 of video) but I cannot ascertain from a quick glance of the R&A how much of Volex’s turnover is in this sector.

I would also need to ascertain who are their competitors and the size of their addressable market (I would imagine it was several multiples of their turnover?)

Thank you Stockwatch very interesting

FREng

22nd Jan '20

I was just reviewing Volex (LON:VLX) and noticed that the FD, Daren Morris, has been steadily selling down his shares and options over the past few months. It's not a comforting sign from an FD (especially where the accounts contain a lot of adjustments, as mentioned above). Has anyone here heard an explanation?

I was just talking with Oli in the office about this. As far as we can see, the CFO has been selling shares that were granted from options but he is still a net buy over the period (increasing his stake from 0.44% to 0.56%). So, although he is not growing his position as quickly as possible he is still growing his position.

jonno

10th Feb '20

I hold Volex (LON:VLX) having bought before the share price took off after the interims last November. I top sliced my holding recently in the light of the Coranavirus outbreak and the potential for supply chain disruption., but have retained a reasonable position. However the share price has taken a pounding of late dropping from a high of round 167p to 129p at present. My best guess and it is just that, is the weakness is due to profit taking combined with fear regrading the impact of the Coranavirus.

Volex has 13 factories worldwide, 3 of which are in China, but it also has factories in Indonesia and Vietnam. The latter enabled it to mitigate the effect of the Trump tariffs and hopefully will help it to offset the disruption that will undoubtedly be caused by the current epidemic.

The stock is is inexpensive currently trading around a PE of 9 and prospective yield of 2% rising to close to 6%. It is financially sound with 25% of the equity being held by the Executive Chairman, Nathan Rothschild. This latter point may be seen as a positive or negative, depending on ones view. I appreciate I am talking my own book and may regret it, however given the potential for growth in medical, data centres and electric vehicles (Volex (LON:VLX) is the supplier of choice to Tesla) there is a reasonable argument that the current share price represents an opportunity.

Share prices are dictated by market makers who drive the price to encourage dealing. Invariably share prices overreact on the downside and the upside in the short term. Hopefully my assessment is broadly correct but I could be eating humble pie. Time will tell.

Finally I admit to finding the share price stability of Strix (LON:KETL) somewhat puzzling. It has 4 factories but the largest by some distance is in China, whether this suggests that something else is afoot at Volex (LON:VLX) who knows? I regard Strix (LON:KETL) as a good company but have sold recently as I was unable see an ability to mitigate the potential supply chain disruption.

All the best

The Volex rerating: from recovery play to growth stock?

No sign of a moat...

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Jack Brumby

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